OUTSOURCING - Cybage€¦ · (d) Offshore Each strategy, which varies from client to client and situation to situation, has its pros and cons from a cost-benefit perspective. For
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India is a successful outsourcing destination in the world of IT and IT-enabled services. This paper discusses both the benefits and the challenges in outsourcing and offshoring. The premise used is India as a destination for
offshoring. This paper also touches upon various engagement models used in offshoring and shares a unique perspective on how Cybage determines which model is best suited for the needs of a particular project and client needs.
The term ‘outsourcing’ refers to the practice of contracting out a company’s internal business processes and IT operations to a third-party organization, primarily to enhance internal focus on core competencies and reduce operational costs. This practice started in the late 1980s and gained popularity at the turn of the 21st century with special emphasis on offshore outsourcing (also known as offshoring), which involves relocating parts of a business function to another country. Today, a majority of Fortune 100 companies and a multitude of SMEs of various sizes offshore parts of their IT operations and business processes. Following is a diagram from the industry’s leading outsourcing analysts firm Horses for Sources. The pie chart provides an estimate of the size of the outsourcing market for the year 2013, which is expected to grow at 5 percent per annum till 2017.
2. India as Preferred Offshore Outsourcing Destination
Since the early 1990s, India has been riding the wave of offshore outsourcing. India accounts for 43 percent of the world’s IT services offshoring market (this is followed by the Western European Union at 12 percent) and 35 percent of the world’s BPO offshoring market in 2013. How India emerged and continues to maintain its dominance in the world outsourcing space has been spoken about quite eloquently
by Thomas Friedman in his acclaimed book ‘The World is Flat’. Also witnessing the surge in outsourcing are China, Brazil, Mexico, Russia, Ukraine, Romania, and Vietnam, along with emerging African countries such as Ghana and South Africa. The advantages India has over these countries are as follows:
The largest English-speaking workforce in the world.
More than three million graduates pass out of Indian colleges every year.
India has already experienced a couple of generations of outsourcing. Hence, stronger project
management and governance processes are in place here to mitigate the risks of offshore
outsourcing.
The Indian government provides significant incentives to software exporters through its
Software Technology Park scheme. This is a mature process, which has been in existence for 25
years.
India has the largest number of SEI CMMI Level 5 appraised companies in the world. This is a
testament to a strong engineering discipline and organized work force in the software industry.
Businesses in multiple disciplines: Be it in the realm of financial services, legal, hospitality,
healthcare, manufacturing, or technology—businesses are flourishing in India (which also has a
burgeoning middle-class population). This domain expertise can be harnessed by foreign clients
for driving business efficiency and developing new generation products and services for their
markets.
Cost of doing business in India continues to be significantly lesser compared to many other
countries.
Figure 2, from leading outsourcing consultant Tholons, gives a ranking of cities in various
countries for outsourcing, using the aforementioned criteria and other associated factors such
as climate, environmental stability, ease of travel, and technological maturity. Indian cities
In outsourcing literature, it is common to encounter terms such as the following:
(a) Onsite: Working from the client’s location
(b) Offsite: Working from a location (not client location) away from the same city or country
(c) Nearshore: Working from a nearby country (typically in the same time zone)
(d) Offshore
Each strategy, which varies from client to client and situation to situation, has its pros and cons
from a cost-benefit perspective. For a defined business value realized from an outsourcing
partnership, the cost savings vary, as shown in Figure 3.
Figure 3: Typical cost savings as a function of distance from the client
India, being a primary offshore destination, offers a competitive rate of cost savings for an
outsourcing engagement. Due to longevity in this space, India is also recognized as a thought
leader in terms of driving more efficiencies and innovation from outsourcing relationships.
3. Benefits and Challenges of Offshore Outsourcing to India Organizations have experienced significant benefits in outsourcing their IT and business process operations to India. The exact benefits in terms of cost reduction vary, based on the nature of the work being outsourced. For commodity work items such as established business processes or well-defined software maintenance, typical cost savings are as per the following chart (courtesy McKinsey). For items that are not well defined and influenced by unfolding business realities, the cost reductions will be less. In these cases, the additional costs incurred, related to communication with an offshore team and governance, will be higher.
A client needs upfront preparations to address these challenges. Additional outsourcing costs
(as defined in Figure 4) tend to pile up if these issues are not addressed in advance, leading to
what literature defines as ‘hidden costs’ or ‘intangible costs’ of outsourcing. Many offshore
providers from India, who have experienced the last two decades of outsourcing, typically
advise clients on these areas on a regular basis during the relationship. Mature providers such as
Cybage also engage in proactive monitoring of problems before they disrupt any work by
ensuring appropriate checks and balances are in place, including escalation mechanisms for the
senior management.
4. Engagement Models for Offshore Outsourcing to India
The most popular engagement models for any outsourcing engagement (onsite, offsite, near-shore, or offshore) are Fixed Price (FP) and Time and Material (T&M). Substantial information on the pros and cons of these engagement models is available. To summarize—the FP model works for an engagement with a tightly-defined scope and requirements, which are unlikely to change. In contrast, the T&M model works for an engagement which is flexible, adjusts to business realities, and whose scope and requirements undergo changes over time. While the client makes the decision on which model is appropriate for a specific engagement, it usually involves a dialog with the offshore provider to flesh out multiple scenarios with their attending benefits and caveats. Recently, a majority of new development projects in the software world follow the Agile model, which is a radical departure from the previous Waterfall model of execution. In the Agile model, since the requirements continue to evolve with time—a T&M model over the product development life cycle—with a fixed number of offshore technical staff usually delivers the best results. When the product goes into maintenance and support mode, again a T&M model with a fixed number of staff delivers better results since the work content cannot be defined in advance. Typically, a T&M model assumes that the client has an extended team offshore; this team works as ‘virtual employees’ of the client. The scope and work content for this team can be realigned as per business priorities, and the team can be ramped up and down as required to achieve the objectives. An FP model can work well in the context of a technology refresh initiative in software development, where a stable and well-documented product needs to be migrated to a new technology platform. Another example of this model can be in the area of automating testing for a product with well-defined test cases. While an FP model reduces a client’s risks in outsourcing by freezing budgets in advance, any deviation from the specifications may trigger a change request and associated fees, which can increase the cost of the project significantly. An FP project also requires specific deliverables to be available at specific times from the client (for example: specifications, reviews and approvals, test results) to prevent offshore idle time and associated cost escalation. A recent phenomenon has emerged wherein many clients (usually small companies) work with freelance software developers and testers. This is done through a few web portals, which match the client’s requirements to a specific resource(s) in their subscription pool. This works for small
projects, which typically do not require a team, and whose frequency is intermittent and duration small. In this paper so far, we have not considered this scenario since these are one-off tasks and do not require strategic planning, internal preparations, or building long-term relationships between the client and the offshore provider.
5. Engagement Models at Cybage
Cybage offers two models of engagement, which are explained with the help of the following
diagrams: (a) A pure offshore model (b) A hybrid model.
In a pure offshore model, the entire delivery team from Cybage is located offshore. The client interacts with the delivery team through well-defined interfaces, as depicted. Governance procedures are well-defined, and communication protocols for regular status checks, reviews and approvals, and escalations are put in place to ensure integrated operations between the client and Cybage. This model works well when the project requirements are relatively stable and there is little or no connectivity required between Cybage and the client’s business or client-facing team, or when the size of the offshore team is relatively small. In the hybrid model, while a majority of the execution still occurs offshore, a smaller onsite staff is stationed at the client’s location—either for a limited period (at different phases of an engagement) or throughout the engagement. This model works well for projects which do not have well-defined requirements or documentation, thereby requiring Cybage engineers to visit a client to perform business analysis or system architecture, and the appropriate knowledge transfer. This activity usually lasts for a limited period. However, for larger engagements where multiple streams of work are involved, the need to have an onsite Cybage team stationed on a more permanent basis at the client location arises often. This onsite team performs liaising and coordination of work between the client’s in-house team and the offshore team to ensure effective integration. This blended model also works well for some other engagements (not large) where the client does not have the bandwidth or capacity to manage an offshore team.
6. Cybage Differentiation: ExcelShore® Model Cybage has developed an extensive Business Intelligence-driven IT system—‘ExcelShore®’—which is dashboard driven, guiding our senior managers to make intelligent decisions on offshore project execution, using real data which has been mined for more than seven years. This system improves the efficiency at every level of offshore project execution: from selecting the right team (based on technology skill sets) to task-mapping to setting up an appropriate team hierarchy to time management to consistency in execution across projects, leading to delivery excellence throughout an outsourcing relationship. The key parameters that a client looks at while selecting an outsourcing vendor includes quality, speed, consistency, responsiveness, attrition risk, scalability, and value addition. Whilst it is argued that cost is also one of the parameters, this is where our thought process is different. We believe that cost is the denominator of all the preceding parameters and the ability of an organization to optimize each of these parameters per unit cost provides the true value proposition to any client. This optimization is realized by ExcelShore® through mathematical and statistical algorithms working on real data gathered from projects and performance appraisal systems. The ExcelShore® system scientifically leverages the entire fact file of the organization in such a way that clients can benefit from every single capability that the organization possesses, while simultaneously minimizing the risks in the process and thereby delivering a measurable ROI to the client. This is the biggest factor that differentiates Cybage from other outsourcing providers. The system has been the subject of attention in the outsourcing world and has prompted Gartner to rate Cybage among cool application service providers in the software industry.
About Cybage Software Pvt. Ltd. Founded in 1995, Cybage Software is a leading offshore software services company offering solutions that accelerate, simplify, and enrich business processes to give its clients an edge over competition. We are an SEI CMMI Level 5 version 1.3 and ISO 27001 appraised company based in Pune, India. Our success is built on a pool of 4,500 software professionals. Based on a remarkable record of quality, consistency, and outstanding technological prowess, we have partnered with more than 200 global software houses of fine repute. Our array of services includes Product Engineering (OPD), Enterprise Business Solutions, and Value Added Services. Cybage specializes in the implementation of the Offshore Development model.
The Cybage domain expertise spans across several business verticals such as Media and Entertainment, Travel and Hospitality, Healthcare and Life Sciences, Retail and Distribution, and Hi-Tech. Cybage has eight technology-focused Centers of Excellence (CoEs) – E-commerce, Enterprise Mobility, Customer Relationship Management, Business Intelligence, Enterprise Content Management, Cloud Computing, Education and Learning, and Supply Chain Management. Our unique model of operational efficiency, ExcelShore®, helps de-risk our approach and provides the best value per unit cost.
To know more about us, visit us at www.cybage.com or write to us at [email protected].